XY$ Radio 005 | CARES Act Economic Stimulus Case Study: Self-Employed Clinical Psychologist

Perspective on the potential personal and business related financial benefits made available by the CARES Act…for this client it looks like the stimulus and other non-stimulus related relief will conservatively be worth over $30,000!

When it became evident that the Coronavirus was going to have a major impact on both the real economy and financial markets, the knee jerk response from the Federal Reserve was to slash interest rates and turn on the printing press. I had my pitch fork ready as I awaited the government’s stimulus package with concern that I would be solely focused on Wall Street and large corporations. To my pleasant surprise I am seeing some significant potential upside for Main Street. Let’s dive into my first client case study – a self-employed clinical psychologist that is married with one child under the age of 17.

I plan to do as many of these as I can (good, bad, and ugly) to help paint a clear picture, manage expectations, and hopefully open some potential eyeballs to the possibilities that exist here.  With that in mind I am going to keep the format consistent so that we can maintain good comparability across cases.

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Client Background

My client is a self-employed clinical psychologist.  She is married and has one child under the age of 17.  Her husband also works and earns an income.  We just recently starting working together and between the news of the pandemic itself and observations of unfavorable movement in stock prices, she was understandably worried about their investments and consequences of all of this on her family’s income going forward.

2018 Adjusted Gross Income (AGI)

2019 Adjusted Gross Income (AGI)
~$173,000 (tax return prepared but not yet filed)

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Recovery Rebate

If you do not have a good handle on how the recovery rebate is going to work, you can listen to my recent podcast episode on the topic (insert link).  As a quick recap, each taxpayer is scheduled to receive a $1,200 tax credit ($2,400 for married couples) and $500 for each child under the age of 17.  That is the maximum amount that will be received before taking into consideration income phaseouts.  The phaseout for married couples begins at $150,000 of AGI and the credit is reduced by $5 for each additional $100 of income over the AGI limit.

This is a credit against the 2020 tax return but because the government wants to create an immediate impact, they are sending out the checks in the near future and will use the most recently filed return to calculate eligibility.  My client did file their 2018 return and had an AGI of ~$153,000.  They would have been eligible for a $2,900 credit, but since they are $3,000 over the AGI threshold, they will receive $150 less for a total of $2,750.  They have not yet filed the 2019 return and this is a good thing because at ~$173,000 of AGI they would have received only $1,750 – a total reduction of $1,000 of free money.  To be fair, if their AGI for 2020 is below $150,000 they would end up receiving any portion of the credit that was not yet received based in the prior returns.  On the other hand, if their AGI ends up being any higher than ~$153,000, none of the credit that they received based on the 2018 return would be clawed back.

So to be clear, this is not just a matter of whether you will get your rebate check now or next year when you file.  For some people and based on their specific situation, they could end up getting more or less total recovery rebate solely based on the way that their income played out in 2018, 2019, and 2020 along with the timing of when their returns were filed.  In this case and per my discussion with the client’s CPA they will delay filing the 2019 return until the recovery rebate is received and deposited.

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Tax and Retirement Provisions

I’ll save a detailed opinion on the future of US income taxes for another time but I think it would be a bad idea to assume that taxes will be the same or lower in the future in comparison to today.  Most of the provisions from The 2018 Tax Cuts and Jobs Act provisions will remain effective through 2025.  After that, who knows?  Based on the amount of debt we are carrying as a country and the rate that it continues to grow based on deficit spending, the only two means of paying for this recklessness is 1) taxes, 2) inflation, or 3) a combination of the two.

Also more to come on this at a later time, but there are good reasons to deliberately choose tax deferred vs. tax free savings vehicles based on the unique case circumstances.  In the case of this client and knowing their situation, I think that it would be a very good idea to concentrate on tax free savings.  This means that they would intentionally choose to pay taxes on their retirement savings today and then never again.  The idea here is that if they are currently in the 22% tax bracket and we think taxes could go far higher than they are today (look up a historical income tax chart to see where we stand now relative to the past), it would make sense to go ahead and pay the tax now and never again.  The opposite decision, to defer taxes now and pay them later, could blow up in the face of the investor.  There is a lot of nuance here and I will spend more time on this in future writings but my general view is that taxes are as low as we will seen them in our lifetime.

With the Coronavirus-related distribution rule that was put into effect, taxpayers that are under the standard age of 59 1/2 qualify to take penalty free distributions of up to $100,000 in 2020.  There are qualifications that must be met here, but nearly everyone in America meets this criteria.  In the case of my client, we are considering making an extra contribution to her retirement profit sharing plan for 2019 to get the tax deduction for that year and then take a qualified distribution in 2020 to either increase their liquid cash or contribute to her Roth 401(k) account.  There are a few ways that this can be handled from an income tax standpoint, but the rules for these distributions allow for the taxable income to be spread over three years.  There is a lot here and we are nowhere near finished planning or making decisions around this, but I want to point out that there are some really good opportunities in this arena for certain individuals and families.

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Unemployment Compensation

This part of the economic stimulus does not apply to this client.

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Key Business Provisions

Paycheck Protection Program
Because she is set up as an S-Corp for tax purposes, some of her income comes through formal payroll that she pays to herself and the remainder is in dividends.  There are reasons that this type of arrangement is utilized in order to avoid paying self-employment tax on the dividend portion of the income.  In her case her 2019 payroll was $46,000.  Based on this she is eligible to apply for a very low interest loan in the amount of 2.5x her average monthly payroll for 2019 ($9,583).  The kicker is that if she does get this loan, anything that she spends in the eight  weeks following receipt fo the funds on payroll, rent, utilities, or group health insurance premiums is forgivable.  Said differently, she is likely to receive $9,583 of free money that she will not need to pay back and the discharged debt will not be taxable.

Employee Retention Credit
It is hard to say if she will qualify for this one, so for now we will assume that she will not.  If she did, however, she could be eligible for additional government assistance based on a year over year reduction in quarterly revenue of 50% or more.  I expect to write about future cases that are eligible for this type of benefit.  The most obvious business model that will qualify for this in my mind is restaurants.  If you know a restaurant owner that has not yet started to explore this or may benefit from this information, please forward this article and have them contact me for a pro bono consultation.

Deferral of Payment of Payroll Taxes
She will certainly be eligible to defer her payroll taxes for all of 2020.  Of the total payroll tax that is accrued in 2020, 50% will be due on 12/31/2021 and the remaining 50% on 12/31/2022.  This should be viewed as an interest free loan.  It would not be wise to spend this money, but to keep it on the sidelines and reserved for dire emergencies and/or no-brainer opportunities.

Net Operating Loss
This part of the economic stimulus does not apply to this client.

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Other Notable Provisions

Relief for Student Loan Borrowers
She does have federal student loans and will have both interest and payments suspended through September 2020.  I would not be surprised to see this extended further.  With a monthly student loan payment of ~$1,000, this is worth about $7,000 to her.

Student Loan Repayment Exclusion from Compensation
I have not looked far enough into the rules on this or discussed it with her CPA, but there is a provision that allows employers to provide compensation up to the $5,250 for purposes of paying on student loan debt.  In these scenarios the compensation is not taxable to the employee.  In other words, she may be able to pay herself $5,250 without paying tax on it.  I will dig into this further and update this post if necessary.

Health Care Related Rules
This part of the economic stimulus does not apply to this client.

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Non-CARES Act Items

While not part of the economic stimulus her mortgage company offered a six month forbearance with no payments, no interest, no late fees, and no credit reporting.  With monthly principal and interest of $1,869, that is worth $11,214.

Auto Loans / Leases
We have not explore this yet but plan to.

We will keep our eyes peeled for other opportunities.

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Published by

Sean Rogers, CFP®

Sean Rogers is a fee-only financial planner in Grand Rapids, MI. He serves individuals and families right in his back yard in West Michigan. He also works virtually with clients all over the country. Sean's firm, Capital Stewardship Partners delivers value-aligned, competent, conflict-free financial advice to Gen X and Millennials. The firm does not have any minimum requirements for net worth, investable assets, or income. This means that you can have affordable access to a fee-only fiduciary regardless of how much money you have available to invest. Sean Rogers is a CERTIFIED FINANCIAL PLANNER™, an XY Planning Network member, a NAPFA-Registered Financial Advisor, and member of the Financial Planning Association and Society of Financial Service Professionals.​